Interested in energy stocks but worried about pollution?

One of the stockmarket's few bright spots this year is energy, a sector that many environmentally conscious investors avoid because of its connection to pollution and climate change. But some companies may be worth a look, says Cheryl Smith, a senior portfolio manager at Trillium Asset Management in Boston. Ms. Smith joined Peter Kinder, president of KLD Research and Analytics, for this month's Monitor roundtable on ethical investing. Here are excerpts:

Q: Can you invest in energy and be green?

Cheryl Smith: Our approach has been to look for companies that we think are the most active in searching for alternative forms of energy, that are the most proactive in terms of reducing the pollution from what they do. Royal Dutch Petroleum [and] British Petroleum are both companies that are better than average on this.

Q: But Royal Dutch/Shell got caught overstating its reserves.

CS: There's no such thing as a perfect company. Certainly, misrepresenting the reserves is not something we want to encourage. The question is: Once that comes to light, how does the company deal with it? ... It may feel ethically cleaner to say: "We're not going to invest in anything." But you lose your leverage. You get the change from being involved with the companies, from being able to go to the companies and say: "I'm an owner. I'm concerned."

Peter Kinder: I take a somewhat different view. I agree with Cheryl about being invested and having the leverage. But there is nothing written that says you have to own these companies. If you have moral objections to them, you should exercise [your objections].

Q: What energy stocks do you like?

CS: We're certainly invested in British Petroleum and Royal Dutch. We also think Sunoco, which is more of a domestic refining company, is attractive at this point. Also Apache, which is natural gas and oil drilling.

Q: President Bush is pushing tax breaks for hybrid cars and clean-diesel cars.

CS: Rather than putting in new tax credits for things you want to emphasize, you could go a long way by taking away the tax credits for the things you don't want to emphasize. We have national highway bills that encourage the use of single-person cars rather than public transportation. That's a tax incentive. We have a variety of ways that subsidize or encourage the extraction of fossil fuels. If you got rid of those, you could put alternative energy on a much more even playing field.

Q: Would that be wise at a time when oil supplies are tight?

CS: I think you would find that economic actors respond quite quickly to changes in economic incentives.

Q: This is corporations' annual-meeting season. What trends do you see?

PK: The most interesting trend is the relationship between the shareholders and the corporation. We saw the Weyerhaeuser annual meeting last week in which a shareholder I know very well was actually physically removed for attempting to press questions to the president of Weyerhaeuser. The question really is flatly in front of corporations and their shareholders. Do [shareholders] have the right to question them at an annual general meeting? Do they have a right to elect the directors who are supposed to represent them?

Q: They elect directors now.

PK: [But] shareholders don't have the right to nominate directors. If the directors are supposed to represent the shareholders, there should be some mechanism other than an election in which there are typically no opponents. It's rather reminiscent of Bulgaria before [the fall of the Soviet Union].

Q: Do you see progress in the push for more democracy in these corporate elections?

PK: Remember, these are not democracies. These are plutocracies. You vote according to how much your investment is worth. But this [election] is the only way that there's an injection of outside influence directly at the board level.

Q: April was a roller-coaster for the markets. What lies ahead?

CS: We think the stock market is fairly valued. You're going to continue to see short-term rates go up. Corporate profit growth is not going to be nearly as fast as it was last year. But it's still going to be within a reasonable frame. We're not looking for a real high year in stocks but not a disaster either.

Watch the entire conversation at www.csmonitor.com/ethicalinvesting

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